Pensioners being ripped off

A good article here on the arguments put forward by "pensions campaigner and former government adviser Dr Ros Altmann" that pensioners who buy "annuities" when they retire are being ripped off.  Annuities are insurance products that you buy when you retire using the money you have saved while at work in a DC (Direct Contribution personal pension) scheme.

"The Financial Services Consumer Panel, which monitors the FCA, recently published a report after a 12-month study into the annuity market. Investigating 15 online firms, and using a £49,950 pension pot example, minus a 25% lump sum, it found fees for the same service went from 0.75% to 3.35%, with costs ranging from £281 to £1255".

Not only fees but annuity "rates" (how much you get after fees) in some companies (even well known ones such as the Pru) are simply rubbish. Even the better schemes offer poor value due to the current price of government bonds called gilts which determine how much you get from annuities.

I am pleased that she highlighted that most annuities are "single life" only. That means unlike Defined benefit pension schemes that cover partners automatically - with a "single life" annuity when the retiree dies - his or her partner get nothing.

In my workplace most employees are in a DC scheme. I dread the day that I will called to see the spouse of a retired union member who wants to know what will they now live on? That day will come very soon.

What was not mentioned is how most people also buy a "level" annuity when they retire. This means  that there is no protection against inflation so each year their pension is worth less and less.

According to this site if you retired 5 years ago inflation would have reduced the value of your level pension by nearly 14%. If you retired 10 years ago by a staggering 30%.

What a mess. Pensioners are being cheated by excessive fees, poor returns and no protection for their loved ones or against inflation.

We still desperately need modern collective Defined Benefit pensions for all.

Hat tip Dave Watson via UNISON Weekly News.

Dr Hari Mann: RSA Tomorrow's Investor programme

Dr Mann was the first speaker at last weeks meeting of the Association of Member Nominated Trustees (AMNT).

He spoke about the 4 year research programme into investments by the Royal Society Arts/Tomorrow's Investor Programme. He and co-author David Pitt-Watson published this report in July on Collective Pensions. 

His key theme was the high cost of many defined contribution pension schemes and the lack of transparency over charges. He prefers the Danish model where you find clear cost transparency which allows market forces to work effectively and drive down charges. In the UK the pension annual management charge does not include all costs. Some schemes charge up to 5% of contributions.

 

While it is clear that due to cost well designed Collective DC schemes are far better than individual DC. They are still clearly inferior than Defined Benefit schemes and always will, be since the risk in all forms of DC, remains with the employees. Also the return from pension annuities is so miserable that you need to save huge amounts in order to receive a decent income from DC.

 

Surely there is no getting away from it that it is better to retain (and reform when necessary) DB schemes? The real problem with DB is not that it is unaffordable but that of outdated accounting standards and the resulting volatility in valuations?

AMNT newsletter – July 2012: meeting review; trustee guide discount

Association of Member Nominated Trustees

 Dear member,

Two weeks ago the AMNT hosted its summer members’ meeting with a number of topical discussions and presentations.

The event, which took place at AXA Investment Managers’ London offices in Newgate Street, began with a presentation by co-chairs Barry Parr and Janice Turner on the association’s latest developments.

Copies were distributed of AMNT’s recent submissions to the Dept for Work and Pensions inquiry into occupational pension schemes and to the Red Tape Challenge. We reflected the consensus of  all our meetings and called for DB trustees to be given the option of using smoothing when carrying out our triennial reviews.

DC trustees were updated on the discussions going on within the pensions industry, in which AMNT is participating, on development of a better type of DC scheme.

These included the finalisation of the constitution, an update on the AMNT’s lobbying activities and an insight into the potential sponsorship opportunities the association is in the process of finalising.

Then committee member Owen Walker gave a presentation on the development of the website.

This was followed by AMNT member and chief executive of FairPensions Catherine Howarth giving a presentation on the shareholder spring and how this affects trustees.

FairPensions has produced a briefing on executive pay, which has been designed with busy trustees in mind.

The idea is to make something available which gives trustees some handy questions they can ask fund managers if they want to be sure that a tough line is being taken on executive pay packages.

You can read it here: http://www.fairpensions.org.uk/sites/default/files/uploaded_files/investorresources/ExecutivePay2012.pdf

Members were then given a presentation by an AXA IM spokesperson on how investment companies can also help trustees to improve their shareholder engagement.

The meeting then split into breakout groups, focused on DB and DC issues.

The working group on defined benefit pensions concentrated on discussing a draft produced by DB working group chair John Gray on what to do if your scheme sponsor announces they want to close the scheme.

This draft is at an early stage and John Gray (john.gray@amnt.org) is very keen to hear from you if you have been through this process, regardless of whether the scheme closed or stayed open.

We are now revising the draft guide, carrying out further research and checking and we hope to circulate it to everyone in the near future. If you are interested in contributing to it please contact John.

After the break, members received a presentation by friend of the association and executive director of OPDU Jonathan Bull on the benefits trustees can receive of indemnity insurance.

Jonathan’s presentation can be downloaded by clicking here.

30% discount on trustee guide

The publishers of The Guide for Pension Trustees are offering AMNT members 30% off this publication which is on the reading list for the PMI trustees’ qualifications. The Guide is a practical and comprehensive manual for all pension trustees.

It contains the essential practical, legal and commercial information that trustees need in order to perform their roles efficiently, accurately and lawfully. You will receive free quarterly updates of the guide, reflecting the latest developments in the sector, and you will have free access to the guide online, which includes additional modules and data tables.

It normally costs £265 but the AMNT discount brings this down to £185.50, and all those taking up this offer will also receive a free copy of the Pensions Pocket Book 2012, which normally retails for £47.50. To obtain the discount you have to quote offer code GPTCW110 when you order. Telephone 01235 465 574, fax 01235 46556 or email subscriptions@marston.co.uk.

Ask your fellow MNTs to join us

The meeting was delighted to hear that AMNT has now grown to about 240 members, and we are responsible for pension funds with collective assets of an estimated £200-billion.

The more members we have the stronger our voice will be in putting forward your concerns to the industry, the regulators and the government, so if you could suggest to your fellow MNTs to join us that would really help.

Kind regards, AMNT Committee

(I posted this late so had to take out an invite to a conference that was out of date)

"Can pension funds shape the future of capitalism?"

Catching up on things. Last month I went straight from the TUC Trustee Pension Conference to the Fair Pension's Guest Lecture at the House of Commons. This was the second presentation I had been to that day on "Capitalism and pensions". I was with a notoriously quiet and reserved UNISON colleague who is a Local Government Pension (LGPS) expert. The lecture was given by Professor Keith Ambachtsheer, Director of the Rotman Institute for Pension Management (left of picture).

He was introduced by John Cruddas MP who is the Chair of the All Party Parliamentary Committee for Responsible Investment. The meeting was Chaired by Catherine Howarth of Fair Pensions.

You can read an account of his speech (and that of Mark Fawcett, Chief Investment Officer at NEST - right of picture) and the full text here. My take on Ambachtsheer is that he believes that Capitalism must be transformed by those who invest in pensions acting as active owners and demanding that capitalism is transformed into a sustainable and wealth creating model. Rather than mainly benefiting "agents" and being subject to their whims.

What I also found striking in his speech was that the traditional argument over pensions about which is best: Defined Benefit or Defined Contribution? Is the wrong question to ask. Instead you should be more concerned with Scale (size of fund), Governance, Investment belief and Fees.  I asked a question about the Local Government Pensions Scheme (LGPS) which has around £140 billion in assets but is split into 101 different funds. Ambachtsheer thought this was just completely wrong to have so many small funds.

Afterwards we went to the St Stephens Tavern where we had some very "interesting" conversations about the future of the LGPS from across the political divide.

Pensions: Who on earth is looking after our money?

An employer covered by my trade union branch offers a Group Stakeholder Pension scheme with Standard Life. As "Direct Contribution" (DC) schemes go it is pretty good but employees have to join Standard Life to benefit from employer contributions. Recently a union member in this pension scheme came to me with a letter from Standard Life which worried him. This letter explained that the company had recently found out that there had been some mistakes in its marketing literature about their Sterling Fund which as not to their "usual high standards". They offered to move his money into another fund and make up any loses.

You might think “What a decent company Standard Life is for doing this, well done for owing up and doing the right thing”.

It now turns out that Standard Life has just been fined £2.45 million for misleading pensions customers “Insurance firm claimed money would be placed into low-risk fund when it was invested in toxic mortgages” The Guardian .  They were forced to pay and had actually shamefully tried to get out of paying anything beforehand.  They had to pay policy holders in the end over a £100 million in compensation!

While I hope that shareholders will paying for this compensation and the FSA fine (I am sure that the poor old policy holders will pay somehow - I also have a paid up policy with Standard Life) it does call into question who is checking up on Standard Life on behalf of policy holders. Who can not only call to account Standard Life over their marketing material but also question why on earth were they investing in toxic mortgages in a just before you actually retire “safety first fund”?

Most proper pension scheme (defined benefit or defined contributions) have member trustees to do this job. Such Group Pension or insurance schemes don’t have trustees. They can (see here) have “management committees” but they have no teeth or legal status. What we need is a requirement for trust based effective policy holder representation on all pensions’ schemes.

After all, surely we all now know what happens when you get capitalism without any owners?

Why are Company Personal Pension schemes allowed to have such rubbish governance?

During last week’s TUC Pension Trustee conference, Robert Laslett, Chief Economist, Department for Work and Pensions was responding to questions after the Minister, James Purnell had to leave. I asked him the question “Why is it that company Personal Pensions schemes don’t have decent governance arrangements in the same way as other workplace schemes? If member nominated representatives in Trust pensions are recognised as being so important in making sure that pension funds are run properly than why not the same for other schemes?”

Robert batted back with the factually correct answer that Company Personal Pension schemes are individual contract based schemes belonging to the pension contributors.

Let me now try and “ungeek” this question and explain why I think this is a really important issue and one that will become even more important in the future.

Traditionally, company pension schemes in this country have been set up on a “trustee” basis. In well run schemes trustees are elected from workers and management to supervise the scheme and make sure it is safe, well invested and properly funded. In recent years trustees have been given more powers and responsibilities. This is not only because of rogues such as Robert Maxwell and the collapse of some pension funds when employers have gone bust. But, due to the size of pension funds and their impact of their investments in the economy as a whole, it is vitally important that that their investment decisions and strategies are properly thought out, managed and implemented. For example the Local Government Pension scheme alone is worth over £130 billion nationally, mostly invested in British companies. Check out the Myners Report.

There is also the principle that pension funds are owned by workers, it is their deferred pay. Since they are owners of this capital they need to exercise their responsibilities of ownership. They will want their representatives on the trustee board to make sure that their money is invested in companies that not only give good financial returns but are also properly run. People do not want their money invested in companies that employ child labour, ban trade unions and destroy the environment. Equally they want to make sure that the companies that they invest in do not reward greedy executives for failure, buy or merge with other companies that do not create value and are generally run in the true interests of the owners (pension members) not the senior management or their City advisors.

In recent years for a whole range of reasons (to my regret – but this is a different matter) traditional trust schemes have been in relative decline and most companies today offer so called Contract based Group Personal Pension schemes or stakeholders. Members of such schemes generally invest via payroll in the pension funds of large insurance companies and usually the company also pays into the holding. There are no trustees or member representatives to check on the administration of the scheme and more importantly, to look after what happens to this money once it reaches the insurance companies.

How do workers know that their money is being invested safely, properly and responsibly? There are now hundreds of billions of pounds invested in companies all over the world by these insurance companies. The market is getting bigger every year.

So, if it is a recognised “good thing” (the “unsung heroes” of financial services) that you have member trustees looking after trust based pension investments then why should we not have member representatives looking after contract based pension investments? Why is one “good” and the other “bad”?

The good(ish) news is that afterwards I attended a workshop run by the Pension Regulator. They regulate such schemes (“approved workplace pensions”) and have published a good practice guide on “Management committees” for administration and governance issues for work based contract pension schemes. These committees would involve employers and employees. So far this is voluntary and does not really address ownership issues. But I suppose this is a useful start. We need to change pension law to address this. This is in the interests of pensioners and the economy.

Have a look at Tom P post on “Investor Suffrage” which I think is a possible way forward. I’ll hopefully also post soon on David Pitt-Watson’s thought provoking speech at the conference which is also relevant.

Hopefully, I have explained the things properly and you release that this is a huge issue. If not, then it is my fault for not explaining it adequately. If you do understand then you are well on your way to becoming a Pension Geek!